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Stones & Bones / health care / volume 10 number 5, May 2008 DOSE OF REALITY Many employers are now promoting Health Savings Accounts (HSAs), offering them to their employees as an alternate to traditional health insurance policies. At first glance, it looks like a good idea. However, when you examine more closely, you may discover that HSAs are not for you. To set up a Health Savings Account, you must have in effect a High Deductible Health Plan (HDHP) insurance policy that your employer or you have purchased. Then you can set up the HSA using pre-tax dollars, and your employer might also agree to contribute funds to it as part of the terms of your employment. However it is obtained, the HDHP policy must have a minimum deductible of $1,100 for a single person or $2,200 for a family, and a maximum out-of-pocket limit of $5,600 for a single person or $11,200 for a family. The out-of-pocket limit applies to the payments for deductibles and co-pays, but not policy premiums. If the HDHP policy offers “first dollar” coverage for limited preventive care, the out-of-pocket maximum might be somewhat higher than the figures stated above. You and perhaps your employer contribute to your Health Savings Account. It is fully owned by you but is held in a bank or similar institution. There, it can be invested in several ways: savings accounts, mutual funds, certificates of deposit, stocks, bonds, annuities, or certain kinds of bullion or coin. Not allowed are investments such as in antiques, works of art, and alcoholic beverages. Too bad on that last one; just as well drink those bottles of vintage wine you’ve been hoarding. The money in an HSA can be drawn out to pay for any permissible medical purpose, or it can be accumulated in the account to pay for medical expenses in future. After age 65, you can spend the money held in the HSA for non-medical purposes as well, but then it is counted as taxable income. One seemingly attractive aspect of an HSA is that you can spend it on medical care that your HDHP policy does not cover, perhaps dental or eye care. However, if you do, the amount spent does not count toward the maximum out-of-pocket expenditure limit of the policy. For example, if your HDHP policy does not cover dental care, any money you take out of your Health Savings Account for that purpose does not count toward the out-of-pocket maximum. Thus a family can spend quite a lot more for health care in a given year than the $11,200 out-of-pocket maximum allowed by the HDHP policy, plus any money paid for the policy premiums. Employers love Health Savings Accounts, and so usually encourage their employees to opt for them in favor of traditional insurance. That is because the High Deductible Health Plan insurance policies the employers purchase for their employees are usually far cheaper than traditional health insurance policies, often by 30 to 50 percent. So even if an employer agrees to contribute set amounts to an employee’s HSA, the employer has usually reduced and capped his health benefits expense. Hence, it is in the employer’s benefit to have the employee choose the HDHP/HSA route. Health Savings Accounts are attractive to healthy high-income consumers requiring little health care because they provide a means to sock away tax-free dollars—in short, to use the HSA as an investment vehicle. The situation is quite different for unhealthy persons of lower income. A recent Government Accounting Office report shows that when all costs are taken into account—premiums, deductibles, and co-payments—less-healthy consumers with HSAs tend to pay more than they would if covered by traditional insurance plans, especially if faced with high medical expenses. The study cites an example of a hospital stay costing $20,000 in which three HSA plans offered by employers resulted in employee medical costs 47% to 83% higher than if the employees stayed with the traditional insurance plans offered by the employers. Thus the bottom line is that if an individual or family member has a chronic condition requiring continuing medical expense, of if the family has children, it is unwise to choose a Health Savings Account over a traditional insurance plan. You can end up paying a bundle. Another warning: If you are thinking of enrolling in a HDHP/HAS plan with the idea of using the HSA as on investment vehicle, be aware that all HSA plans are not alike. Some allow investment in only low-paying savings accounts. Others allow the funds, after some minimum is met, to be invested in higher paying mutual funds. For example, one HSA available in Alaska (First National Bank of Alaska) allows only a savings account that pays 2.5 percent interest on the first $1,000 in the account, 2.9 percent on the next $49,000, and 3.8 percent above that. Another HSA account (First American Bank) also pays low interest on the first $2,000 but allows deposited funds above that amount to be placed in certain mutual funds, some of which have a long-term record of paying approximately 10 percent. The difference in earnings is huge. If you put $1,000 in a HSA account that pays three percent for forty years you earn only $3,595, but if the account pays 10 percent you earn a healthy $45,259. That, of course, assumes you did not take any money out to pay for medical expenses. Neil Davis is a retired geophysicist and author of several fiction and nonfiction books. His most recent book is Mired in the Health Care Morass. More on health care issues can be found at his blog, http://healthcaremorass.blogspot.com. Neil can be contacted at neildavs@mosquitonet.com. | ||
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